Part E: Tax and Pooling Advantages

What are the tax advantages of the Plan?

The Trustees have structured the Plan to obtain three separate tax breaks:

  • Neither employer contributions nor employee contributions to the Trust are taxable income to you;
  • The Trust itself will accrue earnings on a non-taxable basis (which increases your benefits); and
  • Generally, your benefit payments from the Trust will not be taxable income when you receive them.

This is better tax treatment than a pension plan (e.g., CalPERS) or your deferred compensation 457 plan. Benefits from those plans are taxed upon receipt, after you retire. In contrast, the benefit payments from this Trust will not be taxable income to the retirees. (There is one exception,[1] which is if you paid your premiums with pre-tax income — e.g., through your spouse’s cafeteria plan.  In that case, your benefits from this Trust would be taxable income to you.).

[1] Your reimbursement benefits will be taxable income to you if you paid your premium with pre-tax income: Examples include where spouse’s employer deducted the premium from your spouse’s salary or wages prior to calculating the spouse’s taxable income (like from a cafeteria plan) or under the HELPS Act, which allows public safety retirees to deduct $3000 of their pension income used to pay health care premiums.  If your premium is paid with pre-tax income, the IRS requires the Plan to issue a Form 1099 to the participant to show that he or she has received taxable income from the Trust.

What are the advantages of a pooled account over an individual Employee Account system?

The Trust is generally designed so that contributions are held and invested collectively in a “pooled account.” (The Trust provides the Individual Accounts (discussed in Part D) for limited purposes.) There are certain advantages to pooling funds, including:

  • Higher investment assumption is reasonable. This Trust is different than an individual “Health Savings Account” (“HSA”).  This Trust invests the pooled account on a long-term time horizon. The Trustees do not move the investments in a pooled account to a more conservative earnings assumption as a given retiree ages, since the pool is always gaining more funding, and does not have a limited life span. Contrast that to a retiree over age 55 with an individual HSA and no more funding, who generally moves to a more conservative investment portfolio as he/she ages. Actuarial studies clearly demonstrate that the Trust’s plan design produces greater aggregate benefits to beneficiaries.
  • Lifetime benefit payments. The pooled part of the Plan is designed to provide a monthly stream of benefit payments for the retiree’s lifetime,[2] plus a continuing benefit payment stream to the Surviving Spouse during retirement years, until his or her death.  This will become very important in a retiree’s later years, when an individual HSA might run out.

[2] The Plan is designed to provide monthly reimbursement benefits to Eligible Retirees until death.  However, benefits from the Trust are not vested, and the Trustees reserve the right to modify and/or terminate benefits as necessary to preserve the financial soundness of the Trust.